UNILT 2 FINANAL ACCOUNS

Coverage:
Introduction Trading Account, Profit and Loss Account and Balance Sheet. Basic problems. Comprehensive problems. Assignment

FINAL ACCOUNT A Trial Balance is prepared by every organization for a specific period to know the arithmetic accuracy of Account books maintained. However, the Trial Balance does not disclose the result of the business. But a Trader will be very keen to know the result of his business. (I.e. profit/loss and financial position). Therefore Final Accounts consisting of 2 statements i.e., Trading & Profit and Loss Account and Balance Sheet are prepared at the end of the specific period to show the profit earned or loss suffered by the firm and the financial state of affairs of the firm. The Trial Balance is the base from which the final accounts are prepared. Basically, Final Accounts/ Financial statement are organized summaries of detailed information about the financial position and performance of an enterprise.

STAGES in PREPARATION of FINAL ACCOUNTS: a. A Trading Concern will prepare final accounts in 3 stages:i. Trading Account- to find out gross profit. ii. Profit and Loss A/c- to access net profit. iii. Balance Sheet to show the total assets and liabilities. b. A Manufacturing firm will prepare its final accounts in 4 stages:i. Manufacturing Account to know the total cost of production. ii. Trading Account to ascertain the gross profit/ loss for the period. iii. Profit & Loss A/c to ascertain the Net profit/ Net Loss for the period.
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iv.

Balance Sheet to exhibit all the assets and liabilities.

TRADING ACCOUNT Trading Account is one of the financial statements which show the result of buying and selling of goods and/or services during an accounting period. Trading account is prepared to know the Grow Profit or Loss during the accounting period. The basis for the preparation of this account is the matching of selling prices of goods and services with the cost of goods sold and services rendered. Gross Profit Gross Loss Where, Net Sales Cost of Goods Sold = = Sales Sales Return Opening Stock + Net Purchase + Direct Expenses Closing Stock = = Net Sales Cost of Goods Sold Cost of Goods Sold Net Sales

Performa of Trading Account Trading Account of.for the period ended.. Dr. Particulars To Opening Stock To Purchases Less Returns To Carriage Inward To Wages To Freight & Cartage To Import/ Excise Duty To Royalties/ Octroi To P & L A/c (GP transferred to P & L A/c) Rs. Xxx xx Xxx Xxx Xx Xx Xx Xx Rs. Xxx Particulars By Sales Less: Returns By Closing Stock By Good destroyed by Fire By P & L A/c (GL transfer to P & L A/c) Cr. Rs. Xxx xx Rs. Xxx Xxx Xxx Xxx

xxx CONTENTS of TRADING A/c:

Xxx

1. Opening Stock: It is the stock available at the beginning of the accounting year. It is nothing but the closing stock of the previous year. It appears in the Trial Balance and includes raw material, work in progress and finished goods. 2. Purchased refer to those goods which have been bought for resale. Purchases include cash as well as credit purchases. The following items are shown by way of deduction from the amount of total purchases: i. Purchases Returns or Return Outwards (i.e. goods returned to suppliers) ii. Goods withdrawn by the proprietor for his personal use. iii. Goods distributed by way of free samples. iv. Goods given as charity. 3. Direct Expenses: These are the items of expenses incurred to purchase goods and bring them to the godown or to produce a product (i.e. making the goods in suitable condition). These items will appear in the debit. These are as follow: i. Carriage & Cartage ii. Freight, Import duty, excise duty iii. Octroi, Dock Charges, Clearing charges iv. Gas, water, fuel and motive power v. Factory lighting and heating vi. Factory Rent, taxes, insurances vii. Consumable stores viii. Royalties etc. ix. Wages. 4. Sales refer to the sales of those goods which have been bought for resale. Sales include cash as well as credit sales. Sales Returns or Returns Inwards (i.e. goods returned by customers) are shown by way of deduction from the amount of total sales. 5. Closing Stock refers to the stock of unsold goods at the end of the current accounting period. According to convention of conservatism, stock is valued at cost or market price whichever is lower. The rational behind this practice is to provide for anticipating losses. The preparation of a Trading Account requires the passing of entries to transfer the balances of accounts of all the concerned items to the Trading Account. The entries required for such transfers are called Closing Entries, since such entries will close the accounts of all the concerned items. ILLUSTRATIONS on TRADING ACCOUNT 1. From the following balances extracted from the books of Satyanarayan, prepare Trading Account: Rs. Rs. Opening Stock Sales Purchase Returns Carriage Inwards 50,000 287,000 5,000 8,000
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Purchases Sales Returns Direct Wages Salaries

175,000 7,000 25,000 40,000

Carriage Outwards Freight, duty and Clearing charges

10,000 12,000

Factory Rent Motive Power

7,000 3,000

2. From the following particulars, prepare Trading Account of Sri Naveen Kumar of Vijayawada for the year ended 31-12-2005:. Rs. Rs. Opening Stock Credit Purchases Cash Purchases Returns Inward Returns Outward Cash Sales Credit Sales Carriage on goods delivered Import duty Excise Duty 5,000 40,000 30,000 7,000 7,000 60,000 45,000 1,000 3,000 2,000 Octroi duty Cleaning Charges Commission on Purchase Goods given in charity Goods given in samples Wages Carriages Inward 75 25 100 500 100 10,000 3,000

Packaging charges for goods sold 2,000 Export Duties Drawings of goods by proprietor 4,000 500

Closing Stock: Cost price Rs. 30,000; Market price Rs. 40,000. PROFIT & LOSS A/C P & L A/c for the year ended.. Particulars To Opening Stock To Purchases (-) Purchase Returns To Carriage/Freight inwards To Wages To Mfg. Expenses To Gross Profit c/d (Balancing figure) To Operating Expenses: - Administration Expenses - Selling & Distribution Expenses - Advertisement Expenses etc.
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Rs.

Particulars By Sales (-) Sales Returns By Closing Stock

Rs.

xxx By Gross Profit b/d By Non-operating Incomes: - Interest & Dividend earned - Income from Rent - Gain on sale of Investment - Gain on sale of F/A etc.

xxx

To Non- operating Expenses: - Loss on Sale of Assets - Goodwill written off - Fictitious Assets written off To Provision for Taxation (current yr.) To Net Profit c/d (Balancing figure) xxx The preparation of the Profit and Loss Account requires: a) To bring down the gross profit/gross loss and b) To pass the necessary entries to transfer the balances of accounts of all the concerned item to the Profit and Loss Account. xxx

ILLUSTRATION on PROFIT & LOSS A/C 1. From the following information, prepare the Profit & Loss A/c of a Scole Trader for the year ending on 31st March, 2002: Rs. Rs. Gross Profit Salaries & Wages Wages & Salaries Carriage Inwards Carriage Outwards Freight Inward Freight Outwards Discount Allowed Discount Received Dividend Received Profit on Sale of Fixed Assets 500,000 10,000 1,000 2,000 5,000 3,000 5,000 1,000 2,000 3,000 5,000
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Commission Commission received Interest on Long-term Loan Interest Received Rent Paid General Expenses Brokerage Allowed Loss on Sale of Fixed Assets Drawings Income Tax paid

5,000 17,000 3,000 4,000 4,000 1,000 3,000 7,000 5,000 20,000

2. From the following ledger balances of Rajeev, prepare a Trading and a Profit and Loss Account for the year ended 31-12-05: Rs. Rs. Opening Stock Purchases Sales Returns Furniture Machinery Carriage Outward Wages Sales Purchase Returns Carriage inward General Expenses 187,500 271,875 15,000 52,500 243,750 5,625 37,500 690,000 9,375 7,500 7,500 Salaries Commission Received Discount Allowed Bad Debts Commission to Agent Bank Charges Interest Received Rent Received Investments Insurance Closing Stock 7,500 1,875 2,750 1,000 1,875 563 1,125 16,875 375,000 3,750 375,000

BALANCES SHEET After preparing the Profit and Loss Account, the next steps is to prepare a Balance Sheet. A Balances Sheet is one of the financial statements. A Balances Sheet is a statement of Assets and Liabilities of an enterprise at a given date. It is called a Balances Sheet because it is a sheet of balances of those ledger accounts which have not been closed till the preparation of the Training and Profit and Loss Account. Balances Sheet is a statement which shows the financial position i.e. the balances of assets, liabilities and capital, of a business entity at a given date. It is prepared from the trial balances after all nominal accounts relating to goods have been closed by transferring to Trading and Profit and Loss Account. Now accounts left out are the Real accounts and Personal accounts. There will be some newly opened accounts as well, on account of adjustment entries. Some of these accounts may have Debit balances and others have Credit balances. In principle, a Debit balances in a Real A/c or Personal A/c, represents an Assets of the concern/ firm. Likewise a Credit balance in a personal account represents a Liability. Thus, these assets and liabilities are arranged in a proper way and the resultant statement is the Balance Sheet. On the right hand side, assets are arranged while on the left hand side, liabilities are recorded. The totals of the two sides of the balance sheet must agree because of the equation, viz. Assets = Liabilities + Capital.
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A. ORDER of PERMANENCE: 1. The assets are arranged in the order of their permanence, i.e. the least liquid assets (e.g. goodwill), is shown first. The most liquid asset (e.g. cash-in-hand) is shown last. 2. The least urgent payment to be made (e.g. owners) is shown first & the most urgent payment to be made (e.g. short-term creditors) is shown last. 3. The Company as defined under the Companies Act, 1956 is required to prepare the balance sheet in the order of permanence. 4. A general format of Balance Sheet in the order of permanence is shown below:

Performa Balance Sheet of Sri. As per Order of Permanence (Horizontal Format) Liabilities Capital Add: Additional Capital Add: Interest on Capital xxx Add: Net Profit Less: Drawings Interest on Drawings Net Loss Income Tax Rs. xxx xx xx xxx xxx xxx xxx xxx xxx xxx Rs. Assets Fixed Assets: (a) Intangible Fixed Assets: Goodwill, copyright, patent, trademarks (b) Tangible Fixed Assets: Land & Buildings Plant & Machinery Leasehold Property Loose Tools Furniture & Fittings Current Assets: xxx xxx xxx Debtors Closing Stock Stores & Spare Parts
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Rs.

xxx

xxx xxx xxx xxx xxx

xxx

Current Liabilities: Creditors Bank Overdraft O/s Expenses

xxx xxx xxx

Income Received in Advance

xxx

Cash at Bank Cash in Hand Prepaid Expenses Accured Incomes

xxx xxx xxx xxx -----------------

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B. ORDER OF LIQUITY: 1. The assets are arranged in the order of their liquidity, i.e. the most liquid assets (e.g. cash-in-hand), is shown first. The least liquid assets (e.g. goodwill) are shown last. The least liquid assets does not mean and assets which cannot be encashed. 2. The liabilities are arranged in the order of their urgency of payment, i.e. the most urgent payment to be made (e.g. short-term creditors) is shown first. The least urgent payment to be made (e.g. long-term creditors) is shown last. 3. Usually, the banking and financial companies, sole proprietorship and the partnership concerns prepare their balance sheets in the order of liquidity. 4. A general format of a Balance Sheet in order of liquidity is shown below:

Performa Balance Sheet of Sri as per Order of Liquidity (Horizontal Format) LIABILITIES Current Liabilities: (Contents Refer: Above Format) Long Term Liabilities Capital (Contents Refer: Above Format) xxx xxx xxx xxx BASIC PROBLEMS From the following Trial Balance of Manoj as at 31st December, 1996, prepare Trading & Profit and Loss Account for the year ended 31st December 1996 and a Balance Sheet as on that date: Rs. Rs. Rs. xxx ASSETS Current Assets: (Contents Refer: Above Format) Investments Fixed Assets (Contents Refer: Above Format) xxx xxx xxx xxx Rs. xxx

1.

Stock on 01-01-1996 Plant & Machinery Purchases General Expenses Carriage inwards Carriage outwards Factory Rent Discount Insurance Sundry Debtors Office Rent Printing & Stationary Advertising Bills Receivable Drawings Salaries Wages Furniture Cash in Hand Cash at Bank

45,000 75,000 225,000 12,800 2,500 1,500 1,500 350 700 60,000 3,000 600 15,000 6,000 6,000 15,000 20,000 7,500 3,000 12,500 512,950

Bills Payable Capital Sales Sundry Creditors

2,000 75,000 420,950 15,000

512,950

Adjustments: 1) Stock on 31st December amounted to Rs. 40,000. 2) Depreciation Plant and Machinery by5% and Furniture by 10%. 3) Provide for outstanding liabilities: Wages Rs. 1000, Factory Rent Rs. 500, Salaries Rs. 800, Office Rent Rs. 600. 4) Allow Interest on Capital 5%. 5) Insurance Prepaid Rs. 200.

2.From the following Trial Balance of Sri Narendra Prasad as at 31st December,1996 you

are required to prepare a Trading and Profit & Loss Account for the year ended 31st December 1996 and a Balance Sheet as at that date after making the necessary adjustment. Particulars Capital Drawings Machinery (on 01-01-1996) Addition to Machinery (made on 01-07-1996)
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Dr. (Rs.) 16,000 30,000 5,000

Cr. (Rs.) 90,000

Stock on 1st January 1996 Purchases Return inwards Sundry Debtors Furniture & fixtures Freight and Duty Carriage outwards Rent, Rates and Taxes Printing & Stationery Trade Expenses Sundry Creditors Sales Return Outwards Postage and Telegrams Discounts Rent of Premises sub-let Insurance Salaries and Wages Cash in Hand Cash at Bank

15,000 82,000 2,000 20,800 5,000 2,000 500 4,600 800 400 10,000 130,000 1,000 800 1,600 1,400 1,100 21,300 6,200 20,500 234,000

234,000

Adjustments: 1. 2. 3. 4. 5. Stock on 31st Dec. 1996 was valued at Rs. 20,000. Carry forward Rs. 100 for unexpired Insurance. Allow Interest on Capital at 10%. Write off Rs. 800 as bad debts. Depreciate Machinery at 5% p.a.

3.

From the following Trial Balance, prepare Trading and Profit & Loss A/c for the year ending 30th June, 1992 and a Balance Sheet as on that date: Debit Rs. Capital Cash on Hand Purchases and Sales Returns Wages Power and Fuel Salaries Carriage Inwards Stock (1-7-91) Buildings Machinery Furniture
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Credit Rs. 37,000 95,000 600

4,000 45,000 500 8,500 3,500 6,500 1,800 7,200 25,000 15,000 5,000

Debtors and Creditors General Expenses Drawings

12,000 2,600 5,000 141,600

9,000

141,600

Adjustments: -Closing Stock Rs. 15,000

Machinery and Furniture to be depreciated by 10% Outstanding wages Rs. 1000. Write off Bad- Debts Rs. 500. Charge 10% interest on Drawings for full year

4:-- The following are the particulars of Mr. Ramesh for the year ended 31st Dec.2003: Debit Balance Stock on 1st January 2003: Raw Materials Work in Progress Finished goods Sundry Debtors Carriage on Purchases Bills receivable Wages Salaries Telephone,Postage,etc. Repairs to office Furniture Cash at bank Office furniture Lighting Amount (Rs) Credit Balance Amount (Rs)

21,000 9,500 15,500 24,000 1,500 15,000 13,000 10,000 1,000 350 17,000 10,000 1,350

Sundry Creditors Bills Payable Sale of Scrap Commission Provision for doubtful debts Capital account Sales Current assets of William Repair of plant Purchases Plant and Machinery Rent General expenses

15,000 7,500 2,500 450 1,650 1,00,000 1,67,200 8,500 1,100 85,000 70,000 6,000 1,500 3,02,800

3,02,800 The following additional information is available:-

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1) Stocks on 31st December, 2003 were: Raw Materials 16,200 Finished goods 18,100 Semi-finished goods 7,800 2) Salaries and wages unpaid for December 2003 were respectively,Rs.900 and Rs.2,000 3) Machinery is to be depreciated by 10% and office furniture by 7 %. 4) Provision for doubtful debts is to be maintained @1% of sales. 5) Office premises occupy total areas. Lighting is to be charged as to 2/3 to factory and 1/3 to office. Prepare The Manufacturing Account Trading Account, Profit and Loss Account and the Balance sheet relating to 2003.

5:- From the following information you are required to prepare Trading and Profit Loss Account and Balance Sheet Debit Ramans Drawing Plant and Machinery Freehold Property Purchases Opening Stock Amount (Rs) 13,200 99,000 66,000 1,10,000 38,500 Credit Ramans Capital Purchase Return Sundry Creditors Bills Payable Sales Amount (Rs) 2,28,800 1,100 44,000 5,500 2,31,440

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Wages Postage & telegram Insurance Gas and Fuel Salaries OfficeFurniture Office Expeneses Discount Allowed Sundry Debtor Cash at Bank Bad Debts Office Rent Freight Loose Tools Factory Lighting Provision for Bad and Doubtful debts Cash on Hand Loans to Mr. Kumar at 10% p.a. Balance on 1-4-2003

35,200 Interest on Loan to 1,540 Mr. Kumar 1,760 2,970 13,200 5,500 2,750 1,320 29,260 5,500 660 2,860 9,900 2,200 1,100 880 2,640

1,100

44,000

Additional Information:1) Stock on 1-3-2004 was valued at 72,600. 2) A new machine was installed during the year costing 15,400, but it was not recorded in the book as on payment was made for it. Wages Rs.1,100 paid for its erection have been debited to wages account. 3) Deprecition on Plant and Machinery by 33and 1/3 % ;Furniture by 10% ; Freehold property by 5% 4) Loose tools were valued at Rs,1,760 on 31-3-2004. 5) Of the Sundry Debtor Rs.600 are bad and should be written off. 6) Maintain a provision of 5% on sundry debtors for doubtful debts. 7) The manager is entitled to a commission of 10% of the net profit after charging such commission. 6:--The following are the particulars of Mr. Ramesh prepare Manufacturing, Trading and Profit and Loss Account for the year ended 31st December 2003. Debit Land and Building Goodwill Furniture and Fixtures Bills Receivable Rs. Credit 1,00,000 30,000 15,000 15,000 Capital Bills Payable Bank overdraft Discount Allowed Rs. 1,00,000 25,000 23,000 3,000

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Sundry Debtors Commission Paid Dividend paid Carriage Inward Carriage outward Opening Stock: Raw Material Finished goods Purchase of Raw material Plant and Machinery Investment Cash in hand Cash at bank Drawings Salaries Coal and Fuel Factory rent and rates General expenses Advertisement Provision for bad and doubtful debts Sales return Direct Wages(Factory) Power

40,000 5,000 4,000 15,000 7,000 1,50,000 75,000 5,00,000 30,000 25,000 20,000 5,000 20,000 20,000 15,000 20,000 4,000 5,000 2,000 10,000 80,000 30,000

Sundry Creditors Long term loan Sales Purchase Returns

50,000 2,00,000 8,50,000 5,000

Additional Information:1) 2) 3) 4) 5) 6) 7) 8) Stock at the end of the year Rs. 1,00,000. A provison for doubtful debt at 5% on Sundry debtors. Interest on capital at 5% per annum. Depreciation on building Rs.1,000 and Rs.3,000 on Machinery to be provided. Accrued commission Rs.12,500 Interest has accrued on Investment Rs.15,000. Salary outstanding Rs.2,000 Prepaid interest Rs. 1,500.

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